Trade drag slows Canada's economic growth, says RBC

    TORONTO, Jan. 11 /CNW/ - Canada's economy is expected to grow by 2.1 per
cent in 2008, down from 2.6 per cent in 2007, as a result of greater strain
from the trade sector, according to the latest economic forecast from RBC.
    The weakness in trade is a reflection of the high value of the Canadian
dollar and projected weak growth in the U.S., particularly in the first half
of 2008. Recent credit tightening will weigh on growth of both economies in
the near term, according to the report.
    "The improvement in Canada's terms of trade has been an important factor
in supporting the domestic economy," said Craig Wright, senior vice-president
and chief economist, RBC. "Due to the stronger performance of export prices
relative to import prices, Canadians have enjoyed greater spending capacity
from these export revenues. However, import volumes have been growing at a
faster rate than exports, resulting in the overall trade sector weighing down
real GDP growth."
    RBC expects the drag from the trade sector in 2008 to be partially offset
by a combination of the boost in terms of trade, the strong labour market,
rising wages, the one percentage-point cut in the GST and unemployment near a
33-year low. These factors are also expected to support consumer spending
through 2008.
    In sharp contrast to the precipitous declines in the U.S. housing market,
Canada's housing sector is expanding at a strong pace with home prices
continuing to rise. However, the strong Canadian housing market is beginning
to weaken affordability, and will contribute to a slowing in residential
    At the same time, the recent credit market tightening poses a clear
downside risk to near-term growth. It is anticipated that the Bank of Canada
will lower its overnight rate by 75 basis points early this year to address
this risk and the impact of weakening U.S. demand on Canada's economy. Recent
below-target core inflation will facilitate this near-term easing. However, as
the U.S. economy rebounds in the second half of 2008 and more stable financial
markets prevail, it is anticipated the central bank will start to reverse the
easing in the final quarter of 2008 with the overnight rate moving up from a
low of 3.5 per cent to 3.75 per cent at year-end.
    Growth in the U.S. economy is expected to slow to the 1.5 per cent range
in early 2008 and rebound over the second half of the year to an annual
average 2.5 per cent pace as the credit market tightening eases. Despite the
U.S. housing market correction, elevated energy prices and recent erosion in
the stock market net worth of individuals, consumer spending is expected to
remain in positive territory. Although credit conditions have curbed consumer
and business spending, the U.S. economy has benefited from a big boost in its
trade sector due to the currency's sharp decline and strong global demand.
    The U.S. Federal Reserve is expected to further lower its funds rate by
100 basis points in the first half of 2008, which, alongside efforts by the
U.S. government to limit future mortgage defaults, should prove sufficient to
stave off a recession and support stronger growth in the second half of 2008,
noted Wright.

    A complete copy of the forecast is available as of 8 a.m. E.S.T., at

For further information:

For further information: Craig Wright, RBC Economics, (416) 974-7457;
Jackie Braden, RBC Media Relations, (416) 974-2124

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